On 18 November 2015, the Queensland Treasurer, Curtis Pitt, convened a State Government rural banking roundtable to give further consideration to the ongoing concerns relating to farm debt and agricultural finance. Finance partner Peter Kennedy and group head of the Food and Agribusiness team, Isaac West, examine the current issues facing farmers and financiers alike and how they are being addressed.
What’s been done to date?
Drought in significant parts of Queensland, Victoria, Western Australia and the Northern Territory has taken its toll on farm finances. Rainfall in Eastern Australia has been very much below average for large areas for periods of about three years and according to the Bureau of Meteorology, long-term rainfall deficiencies have existed in Eastern Australia over the last 17 years.
Various strategies have been adopted, principally by individual States, to address the financial pressures on farmers. In Queensland, the initial farm finance strategy (QFFS) was developed by the Queensland Farmers’ Federation and the Australian Bankers’ Association in 1996. This is a voluntary scheme to which most banks have signed on to.
The QFFS scheme was reviewed and re-implemented in February 2008.
In Victoria, the Farm Debt Mediation Act was introduced in 2011 and was largely modelled on similar New South Wales legislation which has been operative since 1994. Whilst a Bill along similar lines was introduced to Queensland Parliament in 2003, it was not passed.
The object of the Queensland strategy and the Acts in Victoria and New South Wales is to encourage financiers to:
- negotiate with farmers and their advisers to resolve financial problems; and
- if those negotiations have failed to result in an agreement, provide a framework for mediation.
Whilst the QFFS and similar schemes established by statute in other states have a role to play, they also have their limitations. For example:
- the scheme does not apply if the farm debt is less than $50,000 or greater than $10 million;
- the scheme does not apply if the farmer has become bankrupt or if the farmer is a corporation, it goes into liquidation, administration or receivership;
- the scheme will not apply if any other creditor (secured or unsecured) has taken any enforcement action in respect of any of the secured assets;
- during the negotiations, farmers must continue to meet their financial commitments and must not commit some other default; and
- farmers are required to agree to a time frame for the conclusion of the negotiations which must be no more than one month after the date of commencement of them.
Our associated advisory business, Allegiant FS, regularly assists borrowers in their dealings with financiers and recommends borrowers only enter into such negotiations and only attend mediation meetings with the benefit of prior advice, and in the company of suitably qualified advisors.
Additional support and resources are available to farmers, including the provision of free financial counselling through the Rural Financial Counselling Service. Under the umbrella of this scheme, there are currently 14 service providers employing approximately 120 rural financial counsellors across the country, funded by Federal, State and Northern Territory governments. However these counsellors are constrained by their inability to give financial advice.
Additionally, in Queensland, the Queensland Rural Adjustment Authority (QRAA) provided over $154 million in financial assistance in the last financial year, offering significant relief to farming families. QRAA does this through a number of schemes including concessional loans, disaster recovery assistance and productivity loans, allowing primary producers to upgrade, expand or diversify their primary production enterprises. Some of these schemes operate on the basis of generous conditions including a loan term of up to ten years, interest only for the first five, and concessional variable interest rates. However QRAA like other lenders tests the borrower’s financial viability when assessing suitability for loans.
Rural banking roundtable
On 18 November 2015, the State Government held a rural banking roundtable with representatives from Australia’s major banks represented along with the Australian Banker’s Association, the Queensland Rural Adjustment Authority and the Queensland Treasury Corporation.
The Treasurer proposed conducting an updated rural debt survey to establish the extent of drought related rural debt in Queensland (the last such survey was conducted in 2011). The financiers present indicated a willingness to share data to contribute to the survey.
The Treasurer also committed to writing to the Australian Prudential Regulatory Authority (APRA) arguing the case for the unique requirements of farmers to be taken into account. You might ask why this is necessary. Banks lending policies are overseen and constrained by standards which are administered and monitored by APRA. These standards require banks to assess a borrower’s viability to service and repay the loan being sought. The borrower is given a credit risk grading assessed against the bank’s credit policies. Unless APRA permits banks to take a more lenient approach to the scoring of the viability of borrowers seeking agri loans, the banks are necessarily constrained by these standards.
In addition to the rural banking roundtable, the State Government has also established a Rural Debt and Drought Taskforce coupled with a $52 million drought package announced as part of the State Government’s first budget.
Recent rainfalls over large areas of Eastern Victoria, Eastern New South Wales, Queensland and South Australia have been welcomed. However, they have been largely insufficient to make up for the rainfall deficits for the previous six month period and many agribusiness enterprises remain under financial hardship.
When a farmer’s only option is to end business operations due to financial difficulties, the experience is often traumatic.
The focus that these issues are receiving is commendable.
We will watch with interest to see what response the Treasurer receives from APRA, and any measures which the newly established Taskforce recommends in future. We assume these may include the possible establishment of the previously sought ‘rural bank’.
Perhaps any such bank would be modelled on the QIDC which was originally established in 1902 as the Queensland Agricultural Bank, and which was folded in to Suncorp upon its creation in 1996.
That aside, in our view a nationally consistent approach (which has been considered in the past but not implemented) is necessary to deal with the current state based Acts and schemes.